How AI Is Reshaping M&A Strategy in the Collections Industry

Adam Parks (00:06)
Hello, everybody. Welcome to an episode of Applying AI. In Applying AI, we cut through the buzzwords and talk about realities of deploying artificial intelligence and financial services in other regulated industries. Each month, myself and Mike Walsh will be joined with another guest for us to talk about the practical application of artificial intelligence across the debt collection industry and other financial services.

Today we've got a great guest with us that most of you or probably all of you recognize, Mr. Michael Lamm joining us to talk about the mergers and acquisitions, implications of artificial intelligence in our space. And for those of you that don't know Michael, if it's mergers and acquisitions and it's in the debt collection related industry, he's probably involved and engaged.

Michael Lamm (00:37)
you

Adam Parks (00:58)
So just all of the conversations around how this is going to have a direct impact on these businesses, the value of these businesses, and the changes that we're expecting to see. So thank you so much, Michael, for joining us today. We really do appreciate you sharing your insights.

Michael Lamm (01:16)
Absolutely, Adam. It's great to be here and great to see you, Mike.

Mike Walsh (01:20)
Yeah, should be fun.

Adam Parks (01:22)
So high level guys, M&A is definitely a hot button in the debt collection industry. We've talked about the application of artificial intelligence in the businesses and it appears that we're going to see a bifurcation of the industry over the coming, let's call it 24 months. And the difference, the gap between the winners and losers of the AI race is going to become significantly more apparent over that time period. But Mike, what are you seeing in the open marketplace and how are buyers and sellers viewing their artificial intelligence staff?

Michael Lamm (02:00)
It's a great question, Adam. There are the buyers that are coming in, as I've said to you before in some of our other podcasts, we've got a whole new crop of buyers, investors that want to come into our industry. A lot of them are coming out of Silicon Valley. And again, as I think I said to you, Adam, never, my wildest dreams ever thought I was going to be having conversations with Silicon Valley tech investors about doing something in debt collection. Just wasn't my first thing that I would expect.

They're here, they want to do stuff in our industry, and they're trying to figure it out. Number one, for the companies that are in the market, they're trying to figure out when to buy or sell. They need to be able to articulate. Doesn't have to be perfect because nobody knows where it's going to go. What is their AI strategy? How does it affect their line of business, their service line, first and third party, healthcare, financial services? What is their strategy? Because everyone knows it needs to exist and be involved in the business. It's more a function of how the company wants to apply it in their organization. And I'll tell you, the thing that gets the investors most excited is when they see how significant payroll is in the collections industry and what that line item means to a lot of companies in our industry, what can you do to reduce it with AI? And I've been having a lot of dialogue about that over the past several months.

Mike Walsh (03:29)
You and me both.

Adam Parks (03:29)
I think it's two, yeah, there's two different pieces to that. It's the cost savings of deploying artificial intelligence, but with the difficulties that we've had hiring people across the industry, I think we also have to keep an eye on how can we further empower the agents that are on the phone? How can we get them engaged and involved in the right conversations? We've got this increase in the volume of accounts.

Everybody is, or the majority of our industry is expecting a double digit increase in the volume of accounts over the next 12 months. But at the same time, you've got about a third of the industry that is witnessing a reduction in liquidity of those accounts. So like always, we're being forced to do more with less and we can either empower our live people, we can automate some processes, we can move consumers more towards the self-service options.

But I think we're in this weird balance right now where if we don't start, if these organizations don't start moving down the path of identifying which use cases they're going to deploy, they're going to find themselves on the sale block in the not too distant future and not for a value that they expect.

Michael Lamm (04:45)
Exactly, Adam. That's the biggest issue. But Mike, go ahead. You were about to say something.

Mike Walsh (04:50)
I was going to say too, I think, let's say you're going to go down the sale road and Michael correct me if I'm wrong. I think you have to implement some sort of, no investor is going to look at it and say, ⁓ you're dialing and praying that someone picks up the phone. Like, I just don't see that. mean, today I talked to an auto lender who just got a private equity and they're implementing an AI strategy, right? That was the first thing they did.

Michael Lamm (05:09)
Right.

Mike Walsh (05:19)
Then I looked at, then I was writing a ROI on our first agency we onboarded. It's nine X, it's nine X what they're doing. And they don't no longer make outbound phone calls to their biggest portfolio. And they've gotten almost a hundred percent of that portfolio from their largest client because it's recovered more. They're charging the same price commission based they did and per account they're paying us, you know, pennies. So.

Michael Lamm (05:47)
So guys, but Mike, let's paint the picture here though, The average margin in this industry is somewhere between 10 and 15%, EBITDA. An EBITDA margin today. when you go talk to the investors, they're like, what's that? 10 to 15%, like really? that all? That's all this industry can produce?

Mike Walsh (06:08)
word.

Michael Lamm (06:12)
But then you actually have the discussion about the AI strategy, Mike, like you're referencing, and that 10 to 15% could become 25 to 30%. Well, now you got people listening. You got people saying to themselves, I got something that is going to throw off more cash with less human beings, that's more AI enabled. Who the heck wouldn't want that besides all the other stuff? Right.

Mike Walsh (06:37)
It's more predictable, right, Michael? It's more predictable because AI doesn't have a bad day, right? Like it's not, it's going to show up, you know, it's not going to call out, right? It's more compliant if you build the right engine, right? Like it is, it's not going to swear at anybody. I can tell you that, right? Like it's not, you know, no, it's not going to flip out and drop a bad word. So I think.

Michael Lamm (06:56)
Yeah, it's not going off the chain, right? Right.

Mike Walsh (07:06)
I mean, I think the one mistake people in this industry make, and I'm curious if you see it, is they look at AI as a cost line, not a ROI line. Like, wait a minute, I'm texting at this rate and I'm sending emails at this rate. Why would I pay you to do this? Well, how many people are part of that process? And what does it really do? So generating more, like are you outperforming your competitors? I think that's the biggest hurdle I run into, but when you're out there looking at, you know, buying or sellers, is that something you run into?

Michael Lamm (07:48)
there are guys that are not thinking in the right way and that's what our job is as a consultancy, right? Is to go in and explain to them, you can get X today, right? From an EBITDA or multiple perspective. You could get Y if you pull some of these levers. Do you want to try to pull the levers? Or do you want to just sit and get what you're going to get? And there isn't necessarily a wrong answer if they just want to sit and get what they get.

Mike Walsh (08:13)
No, I agree.

Michael Lamm (08:16)
it's just going to be at different price point. And that may be an age factor, Mike. It may be, I don't have kids in the business or maybe I do, but maybe they'll figure it out. I don't feel like going through the motions of it. And so I think you've got those, you got the haves and the have nots and that there's a gap that's widening pretty, it's becoming just larger for those that have it and that don't in terms of the thought process. And I think that that's a big issue because when the investors are coming in, they're asking guys like us to say, Michael, does this company have the horsepower to do it? Do they need somebody else to help them come up with the AI plan? Because we see the writing on the wall. We see where the market's going to go. It's just the question of whether they want to get there or not.

Mike Walsh (09:04)
That's a good.

Adam Parks (09:04)
There appears to be a pressure on those smaller agencies. So there's this new mounting pressure for the small agency to be able to manage that margin. I think the cost structure of deploying the artificial intelligence is not even necessarily the largest issue. It's the technology limitations of their organization. It's their old DOS level system of record. It's the lack of APIs going back and forth and their inability to move data in a real time format.

Michael Lamm (09:33)
Yes.

Adam Parks (09:33)
The smaller they are, can imagine the more consolidation pressure they're going to feel in the next 24 months.

Michael Lamm (09:39)
They are, but Adam, let me flip that back to you though. I feel like if you go back when I got into the industry, you did too, 25 years ago, whatever it's been, it was a real pain in the neck to start up a collection agency. Think about it, right? Starting it out of your garage like some of the people did and then they hired people and got a phone system and oh, you needed all these other things. Today, I don't know. There may be things that start happening with these.

Adam Parks (09:54)
yeah.

Michael Lamm (10:08)
25 to 35 year old folks that say collection seems pretty interesting. I could run a business like you know without having a lot of staff and I could do it all with AI and inbound calling or inbound like AI with an AI agent. I don't know it kind of flips the script on like you could have a pretty nice lifestyle business with three or four people and do pretty well. And maybe maybe that's part of what happens to a lot of these smaller guys. I don't know but there is that thought process with tech that's different than what it was before.

Mike Walsh (10:43)
I think there's a step in there though, right? Like there's, we've kind of seen a lot of these people from outside the industry come in and say, that exact same thing. I get offers all the time. Hey, we'd love to add. I'm like, no, no, no, no, no. I'm not going to, you know, start up. way. But I think there is value in collection. I work for, you know, huge AI company. I don't think it's ever going to be a hundred percent, virtually like I just don't.

Michael Lamm (10:54)
Okay.

Mike Walsh (11:12)
I think there's too many, uh, edge cases, fraud things. I mean, are we going to do mostly AI agents very soon? If not, like I have a client is pretty much it's only inbound live human beings, right? Like that's it. And it's usually like two, three days a week. Like that they have the agents available.

Adam Parks (11:34)
Anthropic agrees with you. Anthropic released a report early March where it talked about specifically the impact of artificial intelligence in the labor markets. And I've been doing a lot of deep research in this area to try to understand it. According to the research that I've been reading, they're saying 80 to 90% of those call center type jobs will start moving, except in the instance in which the artificial intelligence is being used to amplify the value of the individual agent.

Whether that be a co-pilot talking in their ear and feeding them information faster than they can read it on the screen, allowing them to spend more time focused on the customer. And I think you're going to start seeing that not only in the United States, but we're seeing it across the globe. Every single company out there, and Michael, you probably get almost as many of them as I do on LinkedIn, but no less than once a week is a new company that's an AI.

Mike Walsh (12:18)
version.

Adam Parks (12:28)
voice something or other, reach out to me, offer me a seat on their strategic board for $0 and ask me for a bunch of phone calls. But it's happening at such a fast pace. A year ago, it was one a month. Now it's quite literally at least one a week that I'm hearing from and they all tell you their story. I suggest that maybe they start leading off with the quality of their product and not where they think they're getting their money because that's not actually impressing anybody.

But we can see that organizations are trying to take this ⁓ tool set that they've used in customer service, CX, other places, and think that you're just going to drop it into the debt collection world and it's going to function and you're going to have a fully digital agency. Yeah, don't see the fully digital agency thing happening,

Mike Walsh (13:14)
You have to it out.

Adam Parks (13:21)
really anytime soon, I still think that you're, I think we're going to be able to do more with less by leveraging the technology, but I don't think the people are ever going to disappear. I don't even think that to the 80 or 90% that Anthropic is estimating, I still don't see it going that far.

Michael Lamm (13:39)
I agree, guys, I think you're right, Adam. I'm just saying when you talk to the agency today and where they're sitting and then you talk to the investor, the investor wants magic to happen. They want the people to disappear. And I think we all recognize that's not gonna be the case. There's gonna need to be human intervention when it's needed for certain types of accounts. But these new startup voice AI companies, and they're all over the place, Adam, as you said.

I think what's going to happen with them is they're going to face an inflection point because they're not going to be able to go get clients by themselves. They're going to turn into buyers and they're going to start buying up or trying to buy up the small to mid-sized companies. And we're starting to see that they're having those conversations that are like, can't do this without humans. We're realizing that now, or at least they're starting to wake up and they need to go in and make an acquisition. And I think you'll start to see some of that.

Mike Walsh (14:15)
They can't.

Michael Lamm (14:36)
happen in our industry too, well you'll have the AI company, the voice AI and the collections, the third party collections businesses begin to merge a bit and create some cool platforms that way.

Adam Parks (14:51)
It becomes the seventh use case of debt collection, Mike and I talked about in the first episode of the series. There's six use cases of debt collection and maybe the fully blown AI organization or agency becomes the seventh. Like you said, I don't think it's ever going to be a full blown AI. It's going to be a combo of leveraging the people empowered. It's going to be people powered by technology. That seems to be the path that is most realistic for execution.

Michael Lamm (15:19)
Adam there's so much cost savings in it like even again going back to the 10 to 15% could you imagine these companies thrown off 30% EBITDA I can and I think it's gonna happen it's just they're gonna need to get comfortable Mike with technology that companies like yours have and others that are gonna help them get there they're not gonna be able to build this on their own they're they're gonna need outside assistance to get there and the legacy technology that exists especially the software is going to make it challenging, but they're going to need to do something. They can't just sit and wait.

Mike Walsh (15:54)
There's ways around the tech lag. Like you can build a data lake. Every system has a database, right? You create, you put that in a cloud, you create a data lake. I don't run into, and we deal with agencies across the spectrum, right? Like blue screens, like somebody's literally in 96 when I started, we just were onboarding someone who's using that same system.

That same homegrown adjusted system, you guys could probably guess which one. And there's no problem at all. Right? Like all the data is there. It doesn't matter how it presents itself, right? Or how you're doing it. Companies like me, we build you AI. We'll build you APIs. We'll get the data. That's no problem. I think what a lot of the Silicon Valley money is going to realize or, or, and New York money, like we deal with is a huge part of this whole thing is going to be data security. Where, whose tech is it? Is it built or are they just using other tech? You know, are they using open? Like we've seen, I had a conversation with a guy. He's like, I can't get any clients who can't pass data security. And I'm like, well, good luck with that. Like you're, that's going to be your problem. This is a very, I should get the medical debt or any debt credit card.

That's where I think these small companies come in, realize, oh, wow, we didn't think of this and have a real big problem. I think that's where I tell people all the time, hey, be careful, we're here. I think a company that has $2 billion in revenue and is around the world and has servers in any country you need them is going to be interesting how this shakes out. But I think I agree with you, building is tough. Just keeping up to date with the law, like Adam and I have talked about it a hundred times.

Adam Parks (18:02)
Yeah, we should probably talk about the buy versus build because I'm curious about how that has an impact on the M&A portion of it. I know we, Mike and I did a webinar and towards the end of 2025 talking about, you buy it? Do you build it? And we were having that conversation with someone that I truly respect their opinions on artificial intelligence because I feel like he's a deep nerd like me, Mr. Tim Collins. And we started talking through like, what does it actually look like?

Mike Walsh (18:28)
Yes.

Adam Parks (18:32)
And so as I've been doing this research and trying to better understand the impact of AI on the debt collection industry, it's becoming clear that, well, there's going to be some pretty significant challenges to being able to build. One of the biggest challenges I see is the ability to navigate the ever-changing environment of regulation. And now we're seeing individual states start to look at AI privacy related rules. Even the state of Florida, which is generally not a first mover when it comes to over regulating, has some things on the table within the state Congress looking at these problems. you can't just unwind the model. It can't unlearn things easily. And if we're going to build, that means that we're going to have to have a staff that's capable of managing that going forward.

It's not like building a database and then the database just works, right? Either I pay for the database, someone else to build it. I lease somebody else's or I build it myself. I host it on my server and now I'm thinking about it as a cost savings, but the cost of the AI power, the tokens that are going to have to go into it, the power of the equipment and then the management of not only the model, but the deployment of that model I think is going to be a significantly higher cost over the long run than what we're experiencing.

Michael Lamm (19:30)
Thank you. Adam, when an investor or anybody is going into buying a business, they're looking at what the cap expend is going to look like in order to ramp up, to build, or are they going to be better off just utilizing off the shelf? Most of the time, they're going to see that these companies aren't trying to be a tech company per se, they're trying to be a service business with a tech flavor to them.

I feel like whenever we've been involved in helping somebody buy or sell, when there's a proprietary or they build their own system, it ends up at a lower valuation. There's exceptions to the rule like in healthcare where we've seen proprietary systems be a game changer for somebody that's buying into a new market. But most cases, the investors are looking for simple plug and play and also if the person that develops the system gets hit by a bus, what do you do then?

Mike Walsh (20:56)
Very good point.

Michael Lamm (20:57)
And it happens

Adam Parks (20:59)
Yes.

Michael Lamm (21:00)
man these types of things are it's just like I've seen all these kinds of crazy things But I think that's that's a big thing for the investors today Adam they don't want a lot of guys chasing the the rainbow or the special you know the the special new technology or the new AI model. I think they're more focused on over time figuring out what's the right option for the for the business that could be off the shelf.

Mike Walsh (21:02)
yeah?

Adam Parks (21:26)
From a deployment standpoint, looking at the TransUnion Debt Collection Industry Report year over year, we saw between 2024 and 2025, a 74% drop in non-AI adopters. Three years ago, was most organizations, 70% of organizations saying they would never touch artificial intelligence. Then we saw a drop in 24. We saw a significant, now we're down to 7% of companies saying that they're not going to do it. And I think that that's a focal point on like the major use cases that are specific to the debt collection industry, not to mention the general business technology options that we now have available to us, HR management, accounting, like all of those kind of general, I'm running a business tools are also going to start to have an impact here in our ability to kind of understand our own organizations in new ways.

Michael Lamm (22:24)
Yeah, I mean, think about all the data that the bench, you know, like I know ACA and some of the other associations have tried these benchmarking reports to show where there's different, where there's similarities. The biggest similarity is that most of them don't have a handle on what their true costs are in their business. They have a view of it, but they're not, can you imagine all the things that AI from an automation perspective can tell them and diagnose for them about how much they're paying for health care, IT costs, accounting, you plug it right in, you could see there are much better options. These little things give you 1 to 2% in profit that can be applied.

But I do think the bigger issue, guys, is that when it comes to the clients, the big banks, the fintechs, once they start really allowing the third and first party players to utilize more of the data sets, that's where I think this world really opens up a lot. Because I know there's a lot of limitations from the institutional side on what the third party companies can do. But I do think once that changes, I think game on, right? Because that way we could really start doing much more than what they're doing today.

Mike Walsh (23:43)
I think that change is starting. I really do. As creditors add tools and get comfortable within themselves, the next step is why isn't my agency network using this? And some of them, right, are being restricted. Adoption, it's coming. I think creditors jumped in first.

Michael Lamm (24:00)
you would figure mike that that would be the right the right move right

Mike Walsh (24:12)
And I think that's why agencies didn't jump in. Maybe I think a lot of agencies wanted to go faster, but they were just waiting for a percentage of their volume to allow the use of the tool. Right. ⁓ now you see RFPs where the exact same question that someone looking to buy an agency is on that RFP. What is your strategy for AI? Like what tools are you using? So.I think this is happening now. I think it is, it's going to be where they're going to use it. They're either going to want you to use a different tool or the same tool to evaluate it so they can see that real time. I mean, the data points you brought up, Michael, or exactly like you can have that for yourself as a creditor. And then every agency is using you on your computer. You know, you can open it Christmas morning and say, look, how's everybody doing? insane. And

Michael Lamm (25:10)
Right

Mike Walsh (25:11)
then the data, I agree with you too, is what investors want to see is what data they have access to. They want to see where they can clean up, add them to accounting, waste. Do they need a 60,000 square foot call center? Everybody works at home. I think there's so much in so many different directions you could go, but

Michael Lamm (25:21)
Yeah.

Mike Walsh (25:34)
I think we're going to see that open up more and then especially I it sounds crazy, but I would love to see a federal law about the use of AI like AI calling. That's got to change.

Adam Parks (25:47)
To manage it federally than to allow these states to create a patchwork that makes our artificial intelligence non-competitive on a global scale.

Mike Walsh (25:55)
Yes.

Michael Lamm (25:56)
Yeah, mean, God, we have, yeah, I mean, having every state with a different role, I mean, we already deal with that enough with licensing and other state regulatory issues. Can you imagine that being, just, you know, lead to more problems, right?

Mike Walsh (26:09)
Well, it kind of is. Well, that's, mean, we monitor every state for all these different AI laws that are, I mean, 21 are on the books just this year, you know.

Adam Parks (26:21)
Yeah, mean, to see Florida put one up there even for discussion kind of shocked me.

Mike Walsh (26:24)
I get further.

Michael Lamm (26:26)
Adam, should we start a new business in AI licensing, AI privacy compliance business?

Mike Walsh (26:29)
Thank you.

Adam Parks (26:34)
I think that is a business that's going to happen. let me ask you this. Let me throw a monkey wrench into the general thought process of artificial intelligence here. It was a major fintech organization. I want to say it was about two years ago at a private event pointed out that the better they get at. AI technology, the more difficult our lives become in the third party and even in the first party space. Because if the creditors are able to scale their operations and if they're comparing their AI to our AI and we're buying these out of the box solutions, where's that differentiation that has always made the debt collection industry special and the reason in which we exist?

Because it's not just second voice, it's the level of expertise. But the more that we start to rely on those models and tool sets, how is that going to be impacted? And what is that going to look like for the industry over the next few years as the creditors who have the most amount of money to work with going to impact the rest of us and the profitability of our organizations?

Michael Lamm (27:43)
Adam, that's a hell of a question. And I will tell you, I feel like there's always going to be a place for the third party because at the end of the day, the creditor, the financial institution, whatever it is, the apartment collection, the property management company, it's not their core competency. They don't, it's not like they want to be a expert in third party collections, even if they've got the best LLM and every tool that you could imagine they ultimately want somebody to help them do it better and more efficiently.

So I think what they're going to likely do if you go into the future is it's going to get things easy stuff is going to get dealt with internally harder stuff where they can't figure it out is probably going to go outsourced and then the question is the vendors that are there are still operating, they've got to become experts at that and be able to price it accordingly to make their modeling and everything else they do that much better as a result of it.

Mike Walsh (28:51)
I agree with you, Michael. I also think too, like, there's still an element of the consumer being able to pay, right? Like, you know, if you lose your job and that's why you're not paying, right? Or let's say you get the double whammy, you're a construction worker, you have a medical issue and you cannot work and you're not making money, right? Like it doesn't matter what AI, it doesn't matter how they reach you. It doesn't matter anything.

You got a family, got lights, you got food, you're not paying, right? Like, so I still think there will always be a space for agencies. And I've actually had this conversation with a lot of creditors. I think, I think we're, you know, the outsource phone calls, that business, especially overseas because of the labor pressures they're going to get.

creditors are going to get. I think what call centers they have will be in the US the most of the ones I've talked to are thinking that AI can cover the cost differential, bring it to the US have actual virtual agents covering as much as they can, different journeys where they can't, they'll send it to the humans, keep that core group. And then I still think third party will always be there because I think the voice is different Adam. And to Michael's point, there's a different expertise. People in this industry know this. That is a huge part. Like even at EXL, like we don't sell our AI to every type of business, right? We, we stay in our core industry knowledge, insurance, collections, banking, financial, like we don't go out to things like government and go down that world.

I mean, we could, but it's not our expertise. So there's other people who are doing that, right? Like there has to be the management, the expertise level. I think agencies still do that very, very well. And combining the two, those are going to be the people who win the expertise with the tech.

Adam Parks (30:58)
The technology powered people is where I think that differentiation continues to live because right now there's still opportunities to collect on the low hanging fruit directly using the artificial intelligence tools. But I see that actually decreasing over time rather than increasing where the increase I see is going to be where we're empowering those people. There's still going to be the self-service pieces and the communications and are we able to get through and are we able to perfect the messaging.

So I'm not saying the digital communications or anything is going to totally disappear, but I think it'll become more difficult to collect strictly through a non-engaged or a non-human channel. But our ability to empower those humans and to still continue to support it. Because if you look at some of the creditors, especially if you think about like late 90s, early 2000s, the growth of those agencies was directly related to the banks not wanting to have these giant call centers.

That was what they were trying to move away from. And even if you look at the IPO filing from Jefferson Capital, they talk about how that onshore large call center model is not a long-term sustainable operation. And they've been looking at and deploying these other solutions in order to maintain that profitability or to be able to liquidate portfolios.

Michael Lamm (32:16)
You There's no doubt, Adam. All of these things, I think when you go back to the market, is that an agency today has, there's an art to it, right? At some level, there's an art to collections. And as a result of that, that nuance is gonna keep these companies operating. I just think that the type of business that's gonna flow to them is gonna change. And I think their overall model, their workflow, has to be enhanced with hopefully the client support in order to get there with that and other things.

But I do agree with Mike. I think it's going to get there. It's just going to be question of timing and everything else. But the investors that are out there, I think, are really interested and intrigued by what this industry, like an AI-powered agency, what it really could do and what the margins could be and how quickly can it grow. And I'm excited by that. I think that brings opportunity for all of us.

Adam Parks (33:23)
What do you think it looks like over the next 12 to 18 months in terms of deal flow and price differential based on the technology stacks? Do you think that that increases faster over the next 18 months and slows down? Like how do you see it over 18 and 36 months happening?

Michael Lamm (33:46)
I think you're going to see an acceleration of deal activity, not just because of where our industry is going, but more because of where the economy is. I think right now, volume is up, profitability is up, people are working, so the unemployment is generally low. Those are positives that when someone's coming in and looking at a company in this space, they can see positive EBITDA, they could see growth and they don't see an economy that's crashing, at least as of today. So that's going to drive M&A activity. But there's about two or three things I would tell you to keep in front of you. One is the law firms are getting a lot of attention. The debt collection law firms, they're attracting a lot of investor interest because of how manual intensive their workflows are. Can't wait to see what AI does to that side of the market.

Second is the government. If the student loan thing ever gets figured out and God knows if it ever will, that impact our collections industry, that could also create a huge opportunity for those that collect or service or purchase any kind of student loans. There could be a big market opportunity that comes from that. So I think those are going to be the big ones. And then the last one is what we're talking about here is the technology adoption.

Because if the investors, buyers see that there's real technology adoption, real change with some of the legacy software, I think that'll drive even more deal activity and interest in the space too.

Adam Parks (35:27)
Well, as we're in this, the FCC recently released their request for comments related to basically trying to block BPOs to set an English proficiency standard. And a lot of organizations, whether it be agencies, debt buyers, and even law firms are relying on this offshore work and capability in order to run their businesses. So, let's pretend in a world in which that actually goes forward and we start blocking this, is there a solution other than the deployment of self-service and artificial intelligence that these organizations could even deploy given that type of a major regulatory shift?

Michael Lamm (36:13)
Adam, it's a game changer. And if there's rule changes there, I mean, think about what that does to every industry if that changes. But it's going to have a significant impact. And I'll tell you, the law firm side of it, they're not as equipped as a traditional third party agency to deal with the workflow and the intensity of it onshore and the cost associated with it, too.

Adam Parks (36:16)
The whole world. The cost associated, especially for those organizations that are operating in a metropolis area, is going to be significantly higher. So the only other option that they're going to have to be able to replace that is to perfect their remote employment and to start hiring in more rural areas where the cost structure is not so high. I don't have another solution.

Mike Walsh (36:57)
or open up somewhere,

Michael Lamm (36:59)
There isn't. Somewhere,

Mike Walsh (36:59)
you know, an office.

Michael Lamm (37:03)
yeah, in Idaho or wherever you're going to go, that you're going to get the cheaper option. But still, it ain't India, right? It's not the Philippines. So it certainly could be a significant impact, which is going to create many different dynamics across this industry if something like that takes hold.

Mike Walsh (37:05)
Yeah. I do think that AI though is creeping into that space more and more. It's so fragmented in different rules in every jurisdiction, but there is so much process that can be automated in using AI that.

Michael Lamm (37:40)
Yeah, there's these new AI law firms that are coming out, Mike, that are pretty impressive. I don't know how proven they'll be, but it's wild to see that side because collection law firms make up a big chunk of this industry. They're all over. There's the mom and pops and then the large ones. But I think you're going to see a lot more M&A activity there, Adam, in the next 12 to 18 months.

Mike Walsh (37:45)
Absolutely.

Adam Parks (38:06)
It would make sense because pushing to new jurisdictions, and we saw it again in the TransUnion report that from a law firm perspective, that's their best opportunity for diversification is growing their organization into new states. And they can either build and hire that expertise and start building out those additional jurisdictions, or they can buy somebody who has minimal crossover with them and continue to expand into new areas.

But that expansion, they're either going to have to expand into new areas or they're going to have to expand into new products. They're going to have to expand their expertise and if they've been focused on auto loans, they're going to have to start doing some landlord tenant and some other things in order to maintain that type of operation long-term. I think that's the, at least that's the result. That's what they're reporting back to us in terms of how they're viewing their future expansion. Whereas agencies are looking at it differently.

Agencies are looking at it and saying, If I have to be able to diversify my debt collection business, I'm going to be a BPO service. I'm going to do customer service. They're looking at different services that they can provide on that same infrastructure, that economies of scope. Right? The same reason that McDonald's sells breakfast, not because they love breakfast, but because they have already got buildings and chefs and they've already got stoves and everything else. Why not sell another product based on that same infrastructure?

Michael Lamm (39:24)
What are you eating right now?

Mike Walsh (39:29)
Yeah, what are you eating right now?

Adam Parks (39:29)
There's a McDonald's down the street just because I'm in Brazil. I'm not on the moon, man.

Michael Lamm (39:34)
Alright, alright there you go, alright

Mike Walsh (39:35)
I think you kind of saw that out, right? Like you saw it with the scare with medical reporting. I saw a lot of medical agencies and looking at other streams, right? Like, hey, we do this much medical, we got to find something else, right? Like, and you saw them jump into other spaces, you know, and it is.

Michael Lamm (39:53)
The industry's nimble guys. mean, we always see that they have like, you know, even when we had to go to remote work, people figured it out in 24 hours. They'll figure out Adam how to deal with these BPO rules. If they go into effect, we always seem to figure it out. But I will tell you margin compression is a big issue. So if the investors start to see that there isn't much margin here and it can't go up, it's just going to keep going down.

Well, we're not going to have many investors that are going to be excited about the space, even with AI. They're going to need labor, as we talked about before. And we're going to need to know that that's going to be there. Just depends on how much.

Adam Parks (40:32)
We're all expecting the increase in accounts. And if we start to see that decrease in liquidity, the pressure for that type of technology deployment and cost compression is going to become essential. It's going to be the lifeblood of keeping these organizations going. And it has gotten a little bit better when it comes to being able to hire people, but that's still a really big restriction.

Working in a collection shop, and working for, I'm going use McDonald's again, any fast food location, is paying roughly the same amount in a lot of areas around the United States, but for significantly less responsibility and pressure than being a collector. So I think that's the challenge that we're continuing to face. It's gotten a little bit better in terms of being able to hire and retain staff, but it hasn't gotten significantly better. I think we're still in a pretty difficult situation as an industry.

Michael Lamm (41:28)
I think though if that if we see like a little bit of increase in unemployment, I think that could be really helpful to the industry, right? Because then people are going to be looking for other job opportunities, not maybe saying I don't want to do collections. They may say, if that's available and I can make it work, I'm going to go do that. I think that's something that we haven't seen yet in the economy. We haven't seen a big or significant uptick in unemployment across the country. But I do think that could be coming, who knows, depending on where the pendulum shifts. But I think that's a big item to keep in front of us too.

Adam Parks (42:06)
So between the creditors, the debt buyers, the agencies and the law firms, where do you guys think that the biggest opportunity for the deployment of artificial intelligence to drive margin exists?

Mike Walsh (42:22)
You want me to take this one first, So I think it's agencies, right? And I think it's hard to say drive, just because their margins are so tight, right? I also think because through performance, you can get bigger shares of your clients champion challenge model, right? The first place gets 50%, you know, or

Michael Lamm (42:24)
Yeah, go for it.

Mike Walsh (42:49)
whatever that number is, that's more revenue, right? So it's a quick, to move up that chain, get more market share, drive your costs way down, perform better. It's a win-win-win. Where creditors can only do kind of two of those things. They have what they have. They also, I think, To Michael's point, this industry, agencies are nimble, right? They're good at popping up a new client, right? They're good at increases in volume or decreases in volume. Sometimes creditors have a tougher time with that because they can't just, they have different standards, there's different process, their HR. It is not as easy for them to hire 50 collectors as an agency, it's just not you know.

But I think where the creditors kind of have the head start is They have like you we were talking earlier Adam like they have money and they have well I should say some of them have money some of them have budget but they have people who can research this I think when I talk to agencies a big thing is they just say Mike, how do we do this? Right? Like how do we go through the process and I'm

Michael Lamm (43:58)
Snip.

Mike Walsh (44:11)
Well, here it is. Like this is, you kind of have to map it out where creditors, they'll have someone that's all they did. Like they're procurement person for digital transformation. They know AI, right? Like they know it. They probably come from a FinTech company or a Silicon Valley company and have had experience using all sorts of AI products. So it's good. But I think margin-wise, I think agencies and to Michael's point, I think law firms have a huge opportunity as well. Just the scope of their work, like there's so many other products they can use too.

Michael Lamm (44:48)
I'm going to go with debt buyers guys, because I will tell you, I feel like the debt buyers are in a really interesting spot because they own the debt, even though they've got data requirements and restrictions that you know too, Adam, but they also have the ability to do different things to the product and to what they're in, how they're servicing it and what accounts they want to do certain things to. Do they want to send it offshore? Do they want to go near shore? Do they want to use bot? Do they?

I feel like they've got better control over cost to collect. it's just a different business model altogether, right? So we've been seeing a lot of AI guys that have come to us recently being like, do I really want to be a servicer or an agency? Maybe I just want to buy paper and create some balance sheet opportunities and amass it that way and then control it from start to finish. So I do think because there's more product available in the marketplace, you're going to start to see companies wanting to either as an agency buy some of the paper too so they could do more things to it and experiment with what they're trying to do with AI. Or if they're new entrants expressing interest in debt purchasing and seeing what they could do with cost to collect.

Mike Walsh (46:04)
I think that's a really good point. I just talked to like a new debt buyer who's basically they don't have the paper yet, right? They said, okay, what can this product do for us? And they're like, okay,

Adam Parks (46:04)
Very interesting. Very interesting.

Michael Lamm (46:12)
Yeah! Yeah! The difference with it, is the problem with it is that it costs, you know, got to get a bank line of credit. You got to get a facility, a bank financing in order to go buy it at scale. Anybody can go buy, you know, a small little portfolio, pay 50 grand, get some accounts in, see what happens. But if you really want to scale it, you could do some pretty cool stuff with the technology too. So I think you'll see some new startups there as well that come out.

Mike Walsh (46:26)
Yeah, yeah. Right. Beat up old.

Adam Parks (46:47)
Well, from a debt buyer perspective, the number one use case that we saw in the debt collection survey was specifically how to manage the accounts itself. It was related to prioritization and workflow management, which I think is interesting. And honestly, I was going to answer the law firms because I was thinking about the pre-litigation opportunities. They're the least efficient, the most manual, and that's probably where there's a lot of opportunity.

But after hearing Michael, I think I have to change my answer on that one because I think you're right. I think it is the debt buyers that have the largest opportunity because they have the most amount of control over the process.

Mike Walsh (47:22)
They do.

Adam Parks (47:24)
Well, gentlemen, this has been a fantastic discussion as always. I appreciate you coming on, sharing your insights and participating in this conversation. And as always, I learn a lot every time we talk with you Michael.

Michael Lamm (47:38)
You guys as well. It's always fun. Thanks Adam.

Mike Walsh (47:41)
Thanks, Michael.

Adam Parks (47:42)
And thank you everybody for watching. We appreciate your time and attention. If you have questions, leave them in the comments below on LinkedIn and YouTube. We'll be responding to those and we look forward to continuing the discussion on applying AI. Thank you everybody. We'll see you again soon.